Trillions for Wall St., poverty for workers

By
Fred Goldstein

Published Mar 29, 2009 9:00 PM

There is nothing like the smell of a trillion-dollar bonanza to send the stock
market through the roof. Wall Street has struck it rich with the Obama
administration’s blatantly pro-banker, pro-investor program to revive the
capitalist economy.

The so-called Public-Private Investment Plan, crafted and presented by
Secretary of the Treasury Timothy Geithner, intends to make a trillion dollars
available to the biggest banks, hedge funds, private equity funds and other
investors, supposedly to get the banks to lend money to businesses and
consumers again.

The essence of the plan has two sides to it. First, bribe hedge funds, private
equity funds and others in the shadow banking system who have been sitting on
the sidelines with trillions of dollars—by offering them government money
and loan guarantees to purchase bad bank assets. Second, bribe the banks to
sell investors these bad loans by offering to pay far more than they are
worth.

So the rich get a deal from the Treasury both ways.

The banks are holding onto $2 trillion in bad loans resulting from their
speculation on the great housing and real estate bubble. They don’t want
to sell these bad loans at anywhere near their vastly reduced worth because
they would have to declare them as big losses. Up to now they have been
refusing to sell and have been holding out for more.

Meanwhile, hedge funds, private equity funds and other investors are holding
onto trillions of dollars, which they keep in government bonds and other secure
investments. They don’t want to lend this money to help workers or
businesses or anybody. These moneybags are sitting on the sidelines, looking
for mergers or buyouts, while clipping the interest coupons.

Geithner, Lawrence Summers—Obama’s chief economic adviser—and
company came up with a brilliant modification of the plan to buy so-called
“toxic assets” crafted by former Treasury Secretary Henry Paulson
during the Bush administration.

Here is an illustration of one part of Geithner’s plan. “It works
like this, according to the Treasury Department fact sheet: Imagine that a bank
wants to sell mortgage loans with a $100 million face value. The FDIC [Federal
Deposit Insurance Corporation] would auction the loans to private bidders.
Suppose the winning bidder offered $84 million. The private investor would put
up $6 million, Treasury would put up $6 million, and the FDIC would guarantee
$72 million worth of loans.” (Washington Post, March 23)

No matter if things go well or bad—in other words, whether the assets can
be sold at close to $84 million or if they completely fail and not a penny can
be collected—the bank still gets its $84 million. If things go well, the
investors make a killing on a $6 million investment. If things go bad, the
government gets stuck with the loan to pay off, while the investors walk away
with a minimum loss (which they will write off their taxes). In addition, the
private fund managers get to retain control over the investment.

There is another type of deal in the plan in which the government matches the
private investors dollar-for-dollar and also provides loans to go with it. This
is for the bad mortgage-backed securities.

Make a trillion dollars subject to these giveaway terms and it is guaranteed to
send the stock market through the roof—at least for a moment.

Giveaway vs. ‘nationalize’

There are so many problematical issues involved with this plan that its
prospect for success, even on the terms projected by Geithner and his allies,
seems highly doubtful to more cautious sections of the ruling class.

The giveaway plan represents a victory of the Geithner/Larry Summers faction
over the “nationalization” current in the ruling class
establishment. In this sense it represents a victory of the faction closest to
the big banks on Wall Street that are in the deepest trouble.

The nationalization current, more properly described as those for receivership,
is not so closely tied to the direct interests of these banks and has a broader
view of the needs of their class and the financial system in this present
crisis. Their views are sharply opposed to the Geithner/Summers adventure.

This current wants to stop pouring money indiscriminately into banks that are
already insolvent, change the management, force them to declare losses,
restructure them, take a stake in the banks and then hand them back to private
owners and collect dividends. This view was recently propounded by Thomas M.
Hoenig, president of the Federal Reserve Bank of Kansas City, in a paper
entitled “Too Big Has Failed.” It is easy to see how unpalatable
such a view would be to Citigroup and other large banks.

It is the normal function of the capitalist state and the bourgeois political
parties to protect the interests of the capitalist class as a whole and their
system. This is the way the state has conducted itself, by and large, during
previous lesser crises: the Latin American debt crisis, which endangered the
U.S. banking system during the Reagan administration; the savings and loan
crisis of the late 1980s and early 1990s; and the 1995 Mexican bailout crisis,
when U.S. investors were threatened by the collapse of the Mexican peso.

A ruling class consensus was arrived at on each occasion and the Treasury
Department and Federal Reserve System took the necessary measures to deal with
the situation and avert a collapse.

Crisis has deep roots

But the magnitude of this global crisis is so vast, and the power of the banks
involved, the extraordinary deterioration of their financial conditions, and
their desperation to save themselves at all costs is so great, that the Obama
administration has been dragged into a most questionable scheme.

The administration has become entrapped by the narrow interests of Goldman
Sachs, Citigroup, AIG, Merrill Lynch and their ilk to the point of throwing
trillions of dollars at them to keep these specific banks afloat, at the
expense of using these funds to bolster the system as a whole.

This could have dire political consequences in the long run for President
Barack Obama himself.

Not that any amount of funding could significantly turn this capitalist crisis
around in the long run. It is fundamentally caused by a global crisis of
capitalist overproduction, which has been aggravated and intensified by the
financial crisis.

The present crisis is profound. It represents the end of a 70-year era of
upward development of the productive forces by U.S. and world capitalism that
was propelled by military spending, imperialist globalization, destruction of
the standard of living of the workers of the world, technological attacks on
jobs, devastation of the environment, plus massive credit and indebtedness.
These forces have run their course and no bailout or stimulus package can
change these fundamentals.

But a trillion dollars is a lot of money. It could fund measures to ameliorate
the crisis to some extent if strategically placed—particularly if it were
given directly to the masses, either as wages for a jobs program or as direct
assistance or to cancel the mortgages of the millions facing foreclosure and to
restore the foreclosed families to their homes.

What workers won in the 1930s

One need go back to the administration of Franklin D. Roosevelt to get a sense
of the kind of temporary relief for the workers that could be
administered—even though Roosevelt was never able to solve the crisis of
capitalist overproduction, except through war.

Economist James Galbraith in a Washington Monthly article of March 9, “No
Return to Normal,” cites one study showing that the Roosevelt government
“hired about 60 percent of the unemployed in public works and
conservation projects that planted a billion trees, saved the whooping crane,
modernized rural America, and built such diverse projects as the Cathedral of
Learning in Pittsburgh, the Montana state capitol, much of the Chicago
lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the
Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.
It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and
playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.
And it employed 50,000 teachers, rebuilt the country’s entire rural
school system, and hired 3,000 writers, musicians, sculptors and painters,
including Willem de Kooning and Jackson Pollock.”

No faction of any significance in the ruling class is debating this question
for now because the class struggle is dormant and the masses have not yet risen
up against their conditions as they did during the Great Depression. But that
is because the crisis is only in its early stages. Roosevelt is known for his
concessions to the workers because the workers won those concessions by mass
struggle. Obama has no such situation right now and is hewing to a generally
conservative line of approach. This could change.

In addition, the issue of the AIG bonuses has sharpened the political
situation. Fearing the masses and because their own connections to the big
banks are coming out, the Democratic Party politicians in the House of
Representatives became hysterical in their denunciations of the bonuses to AIG
executives, as did a significant number of Republicans. They all engaged in a
public attack on corporate bosses and, by implication, on their own
paymasters.

The situation may be quieted somewhat now that some of the executives are
returning the bonuses. But this political outburst showed that the right-wing
forces are straining at the bit to become champions of the “little
people” and supposed adversaries of the “greedy bankers” as a
way of getting at the Obama administration. They hope crisis will create an
opening for a right-wing, racist revival. The working class must be on the
alert for this and not be sucked in by any of this demagogy.

‘A dangerous year’

The entire government plan is predicated on a revival of the capitalist economy
and the housing market. This is what will presumably make the bad assets go up
in value, when people start buying houses again and bidding up the prices. In
fact, an announcement that first-time housing sales went up helped fuel a
buying frenzy on Wall Street.

But the Wall Street Journal of March 23 wrote about the rise in home sales that
“nearly half of the sales occurred in the foreclosure/vulture market. So,
home sales are up, but it’s heavily dominated by bottom
fishing.”

More important was a statement by the head of the World Bank, Robert Zoellick,
that 2009 would be a “dangerous year.” He said on March 21 that the
global economy would shrink by 1 to 2 percent during the year: “We
haven’t seen a figure like that globally since the end of World War II,
which really means the Great Depression.” In addition the World Bank was
projecting that global trade was set to slide the most in 80 years, a decline
in exports of 2.1 percent, not seen since 1982. The European economy will
shrink by 3.2 percent (raised from an earlier forecast of 2 percent).
Japan’s economy is projected to shrink by 5.8 percent and the U.S.
economy by 2.6 percent.

Of course these projections are always subject to correction, but they have
been consistently revised in a negative direction. They are confirmed by a
report about global manufacturing. In Europe industrial production is down 12
percent from a year ago. In Brazil it is down 15 percent, in Taiwan a
staggering 43 percent. Manufacturing fell in India for the first time in years.
China’s manufacturing is down by 25 percent.

The three largest imperialist economic blocs—Europe, Japan and the
U.S.—are all predicted to shrink their economies. And three of the most
populous countries in the world, representing two-fifths of the world’s
population, are showing a decline in industrial output.

It is clear that, despite the momentary euphoria of the profiteers on Wall
Street, this crisis is not about to be solved. Even if the banks were to start
lending again, the population is in ruins. No one is credit worthy because they
are in debt, losing their jobs, paying medical bills, paying student loans,
paying their credit card loans and/or are behind in their mortgages.

The idea that it is necessary to give these banks trillions in order to solve
the crisis is either a grand illusion or outright fraud. The bailout is
calculated first and foremost to save the banks while the masses sink deeper
into the real crisis—the crisis of unemployment, homelessness and
poverty.

The only solution is a mass mobilization to fight back against the capitalist
system that is robbing people of their incomes, their homes and their very
lives. The sanctity of capitalist profits is what is at the bottom of bailouts,
layoffs and foreclosures. It is time to say no to capitalism.

Articles copyright 1995-2012 Workers World.
Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.